Asia Stocks recap: China factory data spark share rally

May 21, 2014, 7:42 PM ET

Shutterstock/Chinahbzyg

Welcome to the Asia Stocks live blog, a running account of what the region’s share markets are doing, along with other news. Today, HSBC\’s preliminary report on Chinese manufacturing comes in far stronger than expected, sending shares rallying, with an assist from overnight night gains in the U.S.

As they do every month, the folks at HSBC and Markit will offer the first glipse of China’s current manufacturing activity as they release the “flash” or preliminary version of their Purchasing Managers’ Index.

The April HSBC PMI report printed at 48.1, languishing just below the 50 mark that separates net growth from net contraction, and the current market consensus is for the headline number to nose higher to 48.3, according to TD Securities.

But for TD’s own part, it sees a drop to 47.7: “The flash HSBC Chinese manufacturing PMI for May … could sorely disappoint if the relationship between this sentiment indicator and the iron-ore price is any guide.”

Yes, it seems that since about two years ago, the China manufacturing PMI has been very closely correlated to iron ore. And as readers of this blog know, the recent action for the key steel-making ingredient hasn’t been pretty. According to TD Securities’ data, in fact, iron ore is now a full 10% cheaper than it was in April.

U.S. stocks’ strong gains overnight and the dollar’s rebound against the yen are having a salubrious effect on Tokyo equities this morning, with the Nikkei Average up 0.9% (vs. a 0.3% fall yesterday) and the Topix 0.7% higher.

And it might not have been this way: After Bank of Japan Gov. Haruhiko Kuroda sounded some bullish notes on the economic outlook late yesterday, the yen zoomed higher to send the dollar below the ¥101 handle.

But the yen came off those highs after the release of Federal Reserve minutes focusing on how to exit quantitative easing, firming up the greenback — just how Japanese stock investors like it. At this point, the currency pair is back at ¥101.41.

The updraft from the cheaper yen is lifting the usual tech/industrial/auto-making suspects: Panasonic is up 1.3%, Mitsubishi Heavy is up 2%, Trend Micro is up 2.5%, Suzuki Motor is up 3.3%, Mazda Motor is up 2.7%, and Sony is dancing 1.3% higher ahead of its corporate-strategy conference call slated for later in the day.

Among other names with a big global exposure, Nomura is 2.1% higher, and Softbank is up 1.1%.

In his post-policy-decision remarks, BOJ chief Kuroda offered a specific shout-out for the retail sector, saying consumer spending remained resilient despite the April 1 hike in the national sales tax. The comment appears to be sitting well with retailer shares, as J.Front and Fast Retailing advance 1.4% each, and Aeon adds 1.2%.

And the losers? Toshiba is down 1%, giving back some of the gains earlier in the week on reports it would supply chips for a new Google smartphone. And Hello Kitty creator Sanrio is plunging almost 15% on low volume, putting its stock price 40% below what it was at the start of the year.

Australia stocks are rising into the new day, with the ASX 200 higher by 0.5% — and for a change, it’s not the miners and big banks that are leading the action.

For one thing, we have Qantas up 2%, while rival Virgin Australia is back at the flatline after brief early gains.

Amid intense competition between the two carriers — which CIMB says will result in the pair posting almost $1 billion in combined losses for the current fiscal year — Qantas said Wednesday it would halt its strategy of expanding capacity in a previous effort to grab market share. The move offers Virgin a sort of truce (in the words of The Wall Street Journal).

Meanwhile, construction-material firm James Hardie is basking in the glow of a 2.9% climb for its share price after posting a sharp gain in its annual profit and declaring both a special dividend and an additional share buyback.

And then there’s Woodside Petroleum. Its shares are 1.8% higher after indicating it’s still open to a big deal after pulling out of Israel’s Leviathan natural-gas project.

Elsewhere, mining shares are mixed, with BHP Billiton up 0.2%, Rio Tinto up 0.9%, Oz Minerals down 0.3%, and Fortescue down 0.9%. This, as tug-boat workers at Port Hedland, Australia’s key ore-shipment center, are threatening a labor strike. Both BHP and Fortescue are asking to government to block the strike action.

Stocks are climbing after HSBC unveiled a much-stronger-than-expected China manufacturing report, with the preliminary Purchasing Managers’ Index headline number rising all the way to 49.7 from 48.1 in April.

Perhaps even more encouraging, the output subindex is at a four-month high of 50.3 (it was at 47.9 in April), breaking above the 50 line that separates growth from contraction.

Other details are similarly bullish, with subindexes for both new export orders and overall new orders swinging to gains, though the employment component of the report showed a faster decline than in the previous month.

Mind you that this is only the “flash” version of the May PMI, representing some 85%-90% of the total responses to be used in the final report on this month’s Chinese factory activity.

But the markets don’t care: Hong Kong’s Hang Seng Index is up 0.6% from a 0.4% pre-data gain, while the Shanghai Composite has swung to a 0.3% rise from a 0.1% fall.

And then there’s the Australian dollar, reacting to an improved picture for Australia’s top trading partner by rising to 92.55 U.S. cents from 92.25 cents before the release. Even Japan is getting into the act, with the Nikkei Average, sporting a 1.2% advance in the wake of the numbers.

Hong Kong and Shanghai markets are getting a boost from China’s better-than-expected manufacturing data, with the Hang Seng Index extending opening gains to 0.7%, and the Shanghai Composite Index up 0.5% after a brief opening loss.

Chinese banks are seeing strong gains, with Agricultural Bank of China up 2.1%, Bank of Communications up 2%, China Merchants Bank up 1.9%, China Minsheng Banking Corp. up 1.9%, and Industrial & Commercial Bank of China, or ICBC, up 1.8%.

PetroChina Co. is rising 1%, after its parent company China National Petroleum Corp. (CNPC) signed a multi-billion-dollar deal with Russia’s natural-gas giant Gazprom. According to the deal, Gazprom would supply CNPC, China’s largest oil and gas producer, with natural gas for 30 years, starting in 2018.

On the downside, Chinese computer maker Lenovo Group is retreating 0.9% after a two-day rally. The company announced on Thursday that its net profit jumped 29% for the fiscal year that ended in March.

Meanwhile, Chinese railroad major China CNR Corp. is up 0.4% in its first day of trading in Hong Kong. The company is the one of world’s largest makers of locomotives and rolling stock by sales.

After some economists shrugged off a series of weak China data in recent months, some are also shrugging off today’s strong China data.

Always the first to comment on HSBC’s China PMI is the bank’s own chief China economist Hongbin Qu. While Qu admits that “the improvement was broad-based, with both new orders and new export orders back in expansionary territory,” he’s also troubled by the softer employment subindex, “which implies that this month’s uptick in sentiment has not yet filtered through to the labor market.”

Taking it all into account, Qu renews his call for looser policy from China’s central bank: “Downside risks to growth remain, particularly as the property market continues to cool. We think more policy easing is needed to put a floor under growth in the coming months.”

After tipping a drop in the HSBC flash PMI, meanwhile, TD Securities is cheering the surprise results but is also unconvinced that the economy is out of the woods just yet.

“Today’s data appears to show improvement to be broad-based … However, it is still too early to say whether this index is showing the first signs of breaking its relationship to the iron-ore price,” writes TD Securities strategist Prashant Newnaha, referring to the bank’s observation that the PMI and iron ore have moved in a tightly correlated pattern over the past couple years. (See earlier post on today’s blog.)

PNC senior international economist Bill Adams is also cautious about the signs of a turnaround, saying the data has picked up “to ‘meh’ in May from ‘blech’ in April.”

“The Asian manufacturing business cycle could be stabilizing a bit in May after a tough April, but the improvement is modest,” Adams writes, referring to both the China PMI and similar data out of Japan.

And finally, AMP Capital’s chief economist Shane Oliver takes to Twitter to highlight both the upside and downside in the data:

Japanese stocks are popping higher after Markit released its first ever “flash” version of Japan’s manufacturing index, which rose to a two-month high of 49.9 in May.

The index rebounded from April’s 49.4, although still below the 50 level separating expansion from contraction. Among the sub-indexes, the flash reading of Japan’s manufacturing output also touched a two-month high of 49.2, compared with 46.2 in April.

“The manufacturing sector showed welcome signs of stabilising after the steep downturn seen in April, but producers are clearly still struggling as demand has been hit by the April 1st tax hike,” said Chris Williamson, chief economist for Markit.

Analysts said the result showed Japan’s manufacturing industry has begun to recover after a plunge in the last couple of months.

The weakness caused by the consumption tax hike should be “short-lived”, said Marcel Thieliant, Japan economist for Capital Economics.

However, analysts from J.P. Morgan said there were still signs of weakness in the exports sector, as new export orders continued to decline.

The fall in output prices and employment also suggested that firms were not optimistic on the outlook, Masamichi Adachi, Japan economist for J.P. Morgan, said in a note on Thursday.

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